As many different people already point out, the SEC has closed down ZeekRewards being a Ponzi system. Itâ€™s yet a different restatement of that old saw, if an financial investment looks too good to be real it almost certainly is too good to be true.
A Ponzi scheme is basically one where the payments to the original investors of the large “guaranteed” profits come from the money being put in by later clients. The problem with this kind of schemes being that at a particular point there aren’t sufficient new people and thus the entire system fails. Such schemes are named after Charles Ponzi who most certainly wasn’t the first one to run such a scheme but is the first in our contemporary world, one that is remembered.
Ponzi him self observed that overseas postage coupons were worth different amounts in different countries around the world: thus it was easy to arbitrage making a gain. And it actually was: but solely in small amounts. Almost as soon as he started taking outside investment he had flooded the limited market and was thus having to pay the earnings to early investors from the capital that later ones were putting in.
Such schemes can run for decades: Bernie Madoff’s scheme was precisely this, a Ponzi scheme. His 1% a month profits originated from nothing other than paying those early investors (who made very good money during the decades, very good money indeed) from the new money that his marks were putting in.
The basic point about such investment schemes although is that if you can not learn how the money is being made then it’s most likely a terrible idea to get involved with such schemes. I’ve sat through a number of pitches from such criminals myself. In the 1990s it was Prime Bank Guarantee Funds. The idea being that there was this special market where big banks bought and sold with one another and where huge profits can be achieved. But only special people can get into this marketplace and if you invest right now you could be among those special people……the difficulty being that there's no such special market in Prime Bank Guarantees. In early 00s inside the uk it was trading letters of credit. There is a market in letters of credit, similar to one of the oldest markets around, discounting debts. But that is a market of earning some fractions of a percent by knowing a great deal about peoples’ credit ratings, not something that the individual trader can make great profits from. More recently I’ve seen Medium Term Notes used as a come on. Once again, these exist, but not the large profits claimed by some of the funds. MTNs are definitely the sort of thing a money market fund may possibly put money into: very much a different market place from those claims of big profits.
The essential lesson being: promises of excessive profits at minimal financial risk are generally likely to be bad. When such claims are made it’s in all probability best to look for another investment.
It can be that much easier than this to spot a scam though. I'm on one occasion approached by a guy who swore he knew the right way to turn lead into gold. Quite apart from the physical difficulty of doing this there was a fairly more serious issue. Why in the world might I invest with somebody who could do this? For, moreover, why would anyone who could achieve this look for funding? If you can turn lead (at that time, around $400 a tonne) straight into gold ($10 mil a tonne) then why does one need investors?